How a Utility’s Sketchy Efficiency Practices Could Be Costing Ratepayers More Than $400M

FirstEnergy is one of the nation’s biggest investor-owned utilities, and it has a big problem.

Efficiency investments, required by statute in the state of Ohio since 2008, mandate that utilities such as FirstEnergy make investments in saving energy. These efficiency targets are good for customers, who will save billions of dollars over the lifetime of the investments. However, these same investments could hurt the bottom lines of vertically integrated utilities, which profit from selling electrons and building new electrical infrastructure as customers use more energy, instead of less.

Efficiency programs are a clear example of the tension between what’s good for customers and what’s good for utilities. In some cases, utilities are adjusting their business models to account for these changing market dynamics. However, there are still companies that are engaging in business practices to avoid or mismanage efficiency investments. These practices have a real price tag, to the tune of millions of dollars, as customers miss out on opportunities to save energy and lower their bills.

Exploiting Loophole Savings: $368 Million

In 2008, a law was passed requiring FirstEnergy to help customers save energy. FirstEnergy still had no efficiency programs lined up by the middle of 2009, so in a scramble to meet its end-of-year goals, it proposed purchasing and hand-delivering 3.75 million 100-watt equivalent compact florescent light bulbs, two per customer in their territory, for a cost of $21 per customer. This is about three times what those bulbs would cost at a retail store such as Home Depot.

Again behind on implementing an industrial efficiency program in 2011, FirstEnergy created an incentive program for its industrial customers. These overly lucrative incentives led to the three-year budget for the program being depleted in less than eight months as many projects went forward that perhaps shouldn’t have, before the company finally lowered incentives. These actions stranded contractors who had lined up to complete these projects across the state.

"Going in, of course, we couldn’t predict how popular the program would be, but its success did not diminish opportunities for our customers to participate in other energy efficiency programs. We did not turn projects away based on savings achieved through the mercantile program," said FirstEnergy's senior spokesman Christopher Eck.

Overall, FirstEnergy has invested less in efficiency than other utilities. A good example: FirstEnergy invested approximately as much in helping residential customers save energy between 2009 and 2012 as Dayton Power & Light, a utility that is one-quarter the size of FirstEnergy.

In addition, FirstEnergy has shown compliance by relying heavily on a loophole that allows it to count existing efficiency projects at large consumer facilities toward its total. These “loophole savings” accounted for over 50 percent of its total claimed savings, compared to 18 percent from American Electric Power and 18 percent from Dayton Power & Light and Duke.

FirstEnergy’s reliance on loophole savings between 2009 and 2012 displaced new energy efficiency projects that would have reduced customer energy bills $253 million over time -- instead raising customers’ energy bills by at least $115 million by offsetting new energy-efficiency projects.

“If we could truly implement these programs in the way that they were meant to, electricity prices would fall and homes and businesses would receive some much-needed financial relief," said Dan Sawmiller, senior campaign representative with Sierra Club’s Beyond Coal Campaign.

Weak Capacity Market Bids: $39 Million

Every year, PJM holds a capacity auction to secure enough resources to meet electricity demand three years in advance. The payments that all the generators receive are based on the capacity price, which is set by the most expensive marginal resource needed to meet demand.

As a utility with 20,000 megawatts of generating capacity, FirstEnergy benefits from higher capacity prices. Every megawatt of capacity clearing in the auction creates more revenue for the company, and the more expensive the last marginal generating unit is, the more it gets back across its whole portfolio.

This year, the clearing price in its territory fell from $357 per megawatt-day to $114 per megawatt-day, which translated to a massive financial hit to the company. On the other hand, lower capacity prices were good for customers, who are paying less to have their electricity needs met.

FirstEnergy was partially responsible for the lower prices that hurt them.

The company bid in 75 percent of the projected energy savings it will achieve before the delivery year, which applied downward pressure on capacity prices in the auction. In other words, since total demand was lower, more expensive generators were edged out, making the clearing price that is paid to all the resources lower as well. So while FirstEnergy stands to collect $6.9 million on efficiency from the auction, it will likely lose quite a bit more than that on other generators in its portfolio.

FirstEnergy didn’t bid the energy efficiency into the market voluntarily. It was required by the Public Utility Commission to do so, in part to help “lock in” commitments, since making the bids into capacity markets requires delivery or a risk of being fined. The end result was good for customers, but not great for FirstEnergy.

Remarkably, the story took another turn last month, as a last-minute amendment by Senator Seitz (R-Green Township) in the Ohio statehouse would have required the state public utilities commission to renegotiate the terms of the efficiency commitments with FirstEnergy. If FirstEnergy succeeded in lowering its efficiency requirements during the negotiations, the company could risk being hit with a fine by PJM for reneging on its auction bid -- with the bill ultimately being footed by FirstEnergy’s customers. The amendment did not pass.

This isn’t the first time the capacity markets have been home to some shady business.

Last year, FirstEnergy’s Ohio distribution utilities could have bid around 360 megawatts of energy efficiency into the 2015/2016 auction. Instead, they only bid one-fifth or one-sixth of that, and ultimately only 36 megawatts cleared in the auction.

This could potentially hurt customers in three ways. First, they missed out on the payments from efficiency bids that could be used to offset the costs of making the investments, which in this case would have amounted to $39 million in additional revenues going toward paying off the efficiency upgrades.

Second, consumers could be forced to pay for power plants they do not need, since demand is lower but the market has no way to recognize it.

Third, in some cases this can lead the overall clearing price to be much higher than it could have been -- and customers will pay those extra costs.

Fortunately, because the marginal unit in that auction wouldn’t have been displaced with a full efficiency bid, these last two outcomes didn’t materialize. But that will not always be the case.

Upon reaching out to FirstEnergy, the utility correctly pointed out that this analysis assumes that all 360 megawatts would be eligible in the PJM region and that it owned the resources.

"It would have been irresponsible for the company to bid projected savings into the auction for years in which it had no approval to run energy efficiency programs. If we had we done so and the savings had not materialized, the price our customers would have paid for generation service could have been much higher. The savings we bid into the auction reflected actual savings that had already been installed and that the company owned," said FirstEnergy's Eck.

However, FirstEnergy did not take any steps to ensure that it had ownership of the resources, and there were a significant amount of credits it left on the table.

"Our PUCO-approved program met all applicable laws and regulations and we’re proud of its success," said FirstEnergy's Eck.

Former Commissioner Cheryl Roberto’s dissenting opinion points this out, stating that “the burden is on the Companies [FirstEnergy] to demonstrate that its actions are aligned with both its own interests and those of its customers. [...] The information in our record is insufficient to find that the Companies dedicated sufficient resources to reliability.”

In fact, this is one reason that the Commission ordered FirstEnergy to require ownership as a condition of participating in its programs the following year.

Electricity prices have fallen in Ohio by 1.4 percent since passing efficiency standards. But that's just a small portion of what could be realized if utilities offered up the full amount of energy efficiency on their books.